Inside Alibaba: Vice Chairman Joe Tsai Opens Up About Working With Jack Ma And Jonathan Lu

Joe Tsai had been working in Hong Kong for four years as an executive at Swedish investment company Investor AB when in 1999, he had a chance to visit a barely known Chinese e-commerce start-up, Alibaba. The main founder, an equally little-known Jack Ma, accepted Tsai's offer to join.

Fifteen years later, China has by some estimates soared past the U.S. as the world's largest e-commerce market, early mover Alibaba towers above its rivals, and Ma and Tsai have become the first two billionaires to be spawned by the company. Alibaba, currently 22% owned by Yahoo and 34% held by Softbank, is already worth more than $120 billion, many analysts say.

In a recent in-depth interview with Forbes Asia, Tsai, 49, talked about his impressions of Ma as a business leader, and, for the first time, described the inner workings among Alibaba’s top three leaders -- Ma, Tsai and CEO Jonathan Lu -- since Tsai was named vice chairman and Lu became CEO in May. "I don't think Jack's character has changed" since Alibaba's early days, Tsai said."But Jack's understanding of managing people and managing business -- that level of sophistication -- has gone way up."

Tsai, a permanent resident of Hong Kong, its wealthiest Internet entrepreneur and a good candidate for the 2014 Forbes Hong Kong Rich List to be unveiled tomorrow, also explained what's behind one of the greatest passions in his life: lacrosse. Excerpts of our conversation follow.

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Q: How did you meet Jack?

A: Jack and I met in May of 1999. A friend of mine from Taiwan said, "Joe, you have to meet this guy in Hangzhou. He's kind of crazy, but...” My friend was trying to sell his company to Jack, and I was working for Investor AB, a Swedish investment company.

So when I got to Hangzhou, what I found out was Jack didn't even have a company. He hadn't incorporated anything yet. It was just a website. It had just launched for a few months. A side thing to that was that the first website of Alibaba was in English. It's a global import-export marketplace, and that's why it was in English. I think it was the first Chinese internet company that launched in English. Today we still have that website: Alibaba.com is still the largest global B2B market place.

So I met Jack, and I was fascinated with him as a person. He's very personable and, obviously, extremely charismatic and he was talking about a very big vision. We didn't talk in terms of a business model, profits or anything. He said, “OK, we have these millions of Chinese factories. How do I help them to get exposure to the Western world where foreign companies source from China but (they) don't get to see the light of day?” The Internet is the great equalizer. It levels the playing field.

This was right before (China’s ascension to) the WTO. Prior to that, if you had to export something from China, you had to go through a state-owned trading company. Only state-owned trading companies had licenses. So all these small guys had to go export through state entities. They had no other way to market themselves to the rest of the world. They didn't have that skill set.

I thought Jack had a great idea, but I didn't think it was earth-shattering, putting all these company online. I was fascinated with Jack. What really, really struck me, was that it wasn't just Jack himself, or it was himself with another one or two guys . It was Jack already was with a group of followers. Basically these were his students. As you know, Jack taught English. The kind of students who learn English in university are engineers and import-export people. I just saw this energy. They were working very hard. They seemed happy. They had that glimmer in their eyes. And I thought to myself, “ Wow, this is a guy who can really get people together. He's a great leader. He can really build something.” That's what ultimately convinced me.

What I was thinking was: “Gee, should I jump into something risky?” That's what convinced me. You want to follow someone who could work with other
people, who could lead, aggregate talent from all over the place.

The reason why Jack and I work really well is that Jack doesn't feel proprietary about anything. In other words, he's very willing to admit his weaknesses and say, "Hey, I'm not good at this." A lot of strong entrepreneurs -- and I would definitely say that Jack is a strong entrepreneur -- say, "I'm good at everything. If you want marketing, I'm good at that. Coding? I'm good at that."

For him, I think me coming into the scene was very novel, because I'm the guy who knew finance. I was a lawyer before, I could help incorporate a company and I could help raise capital. So immediately from day one, I think we built a bond.

Q: How much business was he doing when you joined?

A: We had zero revenue. We had something like 28,000 registered users. Today what do we have? 600 million? This was during a time when China's entire Internet population was about 10 million.

Q: So you were the first outsider among those other mainlanders?

A: I was the first outsider and the first non-mainland person to join the team.

Q: That must have been a little delicate.

A: I knew I was in an environment to learn, so I didn't want to stick out . I knew I had a knowledge that nobody else had, so people could trust that aspect to me. So I felt very confident of that and very comfortable in my world. I don't pretend to do everything. I knew what my role was.

One of the most amazing stories about Jack is that he's an inclusive person. Have you ever wondered why Alibaba had 18 founders? It could have been just Jack. Jack is the founder, right?

So this is the story: We didn't have an incorporated entity. It was June of 1999, a month after I met Jack, and he said, "Joe, please help me incorporate the company." I said okay. By the way, I went to study the prospectuses of Sina, Sohu and Netease which all went public that year. All of them were set up as Cayman Islands holding companies with subsidiaries in China.

So I was in Hong Kong, I went to set up a Cayman Islands company, but before we did that, we had to know who were going to be the shareholders. I called up Jack and said, "Look, I know you're definitely the founder and you have a bunch of other people. In your apartment, you kind of called them founders but are they going to be shareholders? Can you just send me a list of people who are going to be the original shareholders? On the list I got, which was sent via fax at the time, I was quite surprised that there were that many people on the list. So basically everybody in the apartment who were all his students were founders from day one. Jack gave away a very substantial part of his equity to the founding team. That's Jack. I think that is unique. You don't see that in other places. Other entrepreneurs tend to say: “I want to keep as much as possible and control it." Jack was all about being open and sharing from day one. I was quite amazed.

Q: Looking back now almost 15 years, aside from getting the company set up, what would you say were your own biggest contributions to the success of Alibaba?

A: That was pretty much it (laughs). Until earlier this year I had been CFO of the company. For a short stint, I was the COO by name only. I really didn't do anything operational. I was pretty much the CFO, basically responsible for raising the capital and structuring investments coming into the company. When we decided to do Taobao, for example, we structured Taobao as a joint venture with Softbank so we didn't have to consolidate that business. We knew it was going to spin off a lot of losses, and we didn't want that to drag down the rest of the business. I've been involved in every single financing and M&A transaction. I don't view that as a contribution. The thing about raising capital (is) I kind of see myself as the sales guy. If the product is good, the thing sells itself.

I would say the first three rounds of venture capital were pretty tough, but after the Yahoo investment in 2005, and as Taobao became more and more successful, the company just went on a tear. The business operation was growing fast, so the investors were chasing us.

Q: How do you work with Jack now?

A: Jack is in Hangzhou. I'm in Hong Kong. We've never physically work in one place but we talk to each other on the phone every day. Throughout the years, I think the thing that has really worked well has been the level of candor you can share with each other. I can be critical of him, and he can be critical of me and we know that we're not going to hurt each other's feelings. That's very important. I remember there are times when I had to argue with him on the phone to the point that I slammed the phone on him, and he did that to me too. But we all knew that we were doing it for the benefit of the
business.

Q: Can you remember what you disagreed about?

A: When we acquired Yahoo China, that business was not very healthy. It was something that needed to be fixed, and we had some questions about who should go in and how to position that business.

Q: How has Jack changed over time?

A: I don't think Jack's character has changed, but Jack's understanding of managing people and managing business -- that level of sophistication -- has gone way up. Jack is an extremely brilliant person, so he learns very quickly and I think he went from being an entrepreneur, just convincing his students to come and work for him, to really a global business leader. I wouldn't call it a transformation. I would say it's a progression. Every year he gets better, and by the way, everybody has grown in the company. I've grown. I think I am today in a way better than I was 10 years ago.

One of the things that we caught on really early on, in terms of managing people was that you have to communicate a purposeful company. That's the company mission. The other thing is having a set of well defined values. These are basically the things that you believe in-- so your business philosophy: how you deal with people, how you deal with things. You have to articulate them, write them down.... so these became our values, and you make people accountable to that. If your behavior is not consistent with our values, it affects your performance evaluation, and you will not get as big of a bonus. In our performance evaluation , whether someone is behaving and keeping our values is actually part of it. It actually effects your performance evaluation. If you're not a team player, didn't embrace change… One of our values is to embrace change, because we live in such a disruptive environment. We had to learn that. When you scale the business, you start to manage a lot of people and it becomes very important to communicate values.

Q: How does Jonathan come into the mix?

A: Jonathan came to the company in the year 2000. He actually came through an acquisition. He was the Guangzhou agent of an Internet fax business that we acquired. That was our first acquisition, and probably our most successful acquisition. We acquired that business not (because) we wanted the business. It was because we wanted the people. He came through that and really worked his way up. I think his first job was a sales manager in Guangdong Province.

Q: Have you worked with Jonathan also?

A: I didn't always work directly with him. I was on the finance side and back then our only business was B2B, and he was on the sales side. The first time I worked with him was when we decided to launch Alipay as a separate company from Taobao, and Jack asked Jonathan to be the CEO of Alipay, and he asked me to be the chairman overseeing that effort. So that’s the first time I really worked with Jonathan.

Q: How do you work together now?

A: We work as partners because we have a partnership internally. So I view Jonathan as one of my partners in the business, which has very, very different implications from a corporate hierarchy, because when you have partners, you're talking to a peer. You're not giving instructions or giving directions or anything and you basically work through issues through discussions and sometimes arguments. I think today Jonathan feels a lot more comfortable with me than maybe six months ago when he first took the CEO job. Back then I think he could have viewed me as Jack's partner. I’m a founder; he's not a founder. This was in May this year. He's the CEO, he should call the shots. If I was Jonathan, I would probably think: Gee if I call the shots, is Joe going to challenge me since he has a little bit seniority over me --he's sort of part of Jack's team?

What I did was I tried to make him comfortable. I told him: “Jonathan, look. I had to step down from the CFO position, I took over the whole M&A and corporate development side of business. “ And I said, “ In that capacity, I report to you. You’re my boss, right? And that’s how we’re going to do this. I
discuss things with you.” And that made him comfortable. So now we have a great working relationship. Every time I go to Hangzhou, when I have the time, I sit down and I have dinner with him just him and me.

Q: How often do you go to Hangzhou?

A: Every month. So it's been a great working relationship and I think a big part of that is because internally are a partnership.

Q: What about the board? You’re the vice chairman. Is Jonathan on the board?

A: Jonathan today is not a board member, but if we were a listed company, the CEO would pretty much be a board member. We still retain the same board composition we had back in 2005, when Yahoo invested. We only have four board members. The management board members are Jack and myself, and then we have Masayoshi Son and a representative from Yahoo, who is Jackie Reses now.

Q: Let’s come back to that question of how to elevate your game. How did you learn to elevate your game? What process did Jack go through to become the successful leader of what’s arguably the world’s hottest Internet company? Does Jack have mentors?

A: I don't think Jack has mentors. But I think a lot of Jack's success today and why people respect him a lot is because he's a teacher. I think there are three characteristics as a teacher that make you successful as a corporate leader: First, you have to communicate well. All good teachers communicate well with their students. They come across as convincing and persuasive. Second, teachers really care about developing other people. That's their job. Their job is to make their students better. So in the position of a corporate leader, what you need to do is to develop your layers of management – make them better. Lastly, teachers are willing to swallow their pride and hire people who are better than they are. If you went back to your high school reunion and you've become really successful and you see Mrs. Smith who was your high school teacher, she is thrilled to see you become a very successful person, way more successful than she is. She's very happy. Teachers always want their students to be better. So you really have to have that humility of self-deprecating character to really bring in people better than you are because that's how organizations improve. Companies don't grow because their leaders don't grow with the company. Jack has always been able to bring in good talent to build the company.

Q: How would public ownership affect the culture?

A: That's why we fought so hard to preserve our culture, to make sure that our partnership structure is intact as we become a public company. I think that's not a negotiable thing.

Q: Jack said when he stepped down as CEO that he wanted to give the reigns to younger people. How do you think his role will evolve now in the next few years?

A: I think he said when he stepped down from the CEO role that he wants to spend more time on strategy. He's executive chairman, so he’s an executive of the company. He also wants to spend time on thinking about the next five to 10 years, where the company is going, and things that may not be immediate. So for example cloud computing is not our main business, and it's not our major business unit, and he’s been very much behind that. Also areas like social responsibility, making sure that we don't forget about giving back as part of our work.

Q: So he's not slowing down?

A: No. The thing is that he's so busy, he's so engaged and so with it-- being part of the business, you can't slow down. The problem is that we all feel such a strong sense of responsibility that slowing down is like abdicating your responsibility.

Q: Can we talk about the IPO?

A: What IPO? (laughs)

Q: How do you think you personally (now as vice chairman) will work with Jack in new ways in the next three years?

A: Actually on business issues, I feel like I can talk to him more now that I have a role at looking at strategic investments, whereas before, I felt a little isolated, to be honest, because I was on the finance side of things and Jack was definitely not going to get involved in anything finance related. So we carved up responsibility that way.

But now I feel like there are a lot of things I want to talk to Jack about, because as we look at possible investment opportunities, whether we have a strategic angle to this or not....I talked to him quite a bit. I want to talk to him. I want to get his views. I also talk to Jonathan, other business units. So I feel like now I am more tied into the business.

Q: What are some of those strategic things that you think have promise?

A: We're looking at international efforts, and the shift of users from the PC environment to mobile is a gigantic trend that could be very disruptive if we don't play this right. I think there's a very strong sense of urgency looking at the possible ways of capturing users.

Q: The investments that you've been doing are pretty much in China, although you did do a couple of U.S. acquisitions a few years ago. Could you go into more deeply into the U.S. through acquisitions?

A: Over 90% of our business is in China, so it's actually natural that we start with China and use acquisitions and investments to complement our business growth. So I wouldn't be surprised that we do most of our things in China. We'll be very careful in expanding through acquisitions outside of China. Obviously there are cultural challenges.

Q: Jack is a big champion of philanthropy. What are you interested in personally?

One side project that's I'm doing right now -- I don't see it as a philanthropic project – is that I'm sponsoring the Hong Kong men's lacrosse team that will compete in Denver in the world championships. Forty teams from around the world are competing. The reason is I played lacrosse in high school and also in college. I was good enough to be on a college team. I certainly sat on the bench for four years. But I love the sport. I think it's the greatest sport I've known, my kids play it and I'm passionate about it. Hong Kong actually has a league because it's been a tradition that Hong Kong university students play. So last year I joined this league – I’m kind of 20 years too old for his -- and played with some of these guys much younger than me. The world championships of lacrosse is once every four years, and Hong Kong is going to field a team and send 23 guys to Denver in 2014. So I told them, look, I'm going to be your full financial sponsor. I'm going to support you. No strings attached. I just love the sport. I just want to put Hong Kong on the map. That’s my contribution to Hong Kong.

I'm a senior editor and the Shanghai bureau chief of Forbes magazine. Now in my 16th year at Forbes, I compile the Forbes China Rich List and the Taiwan Rich List. I was previously a correspondent for Bloomberg News in Taipei and Shanghai and for the Asian Wall Street Journ...